2004/195/EC: Commission Decision of 29 September 2000 declaring a concentration to be compatible with the common market and the functioning of the EEA Agreement (Case COMP/M.1879 — Boeing/Hughes) (Text with EEA relevance) (notified under document number C(2000) 2740)
Date: 2000-09-29
Institutions: European Commission
Subjects: economic concentration, exchange of information, merger control, satellite

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COMMISSION

COMMISSION DECISION

of 29 September 2000

declaring a concentration to be compatible with the common market and the functioning of the
EEA Agreement

(Case COMP/M.1879 — Boeing/Hughes)

(notified under document number C(2000) 2740)

(Only the English text is authentic)

(Text with EEA relevance)

(2004/195/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(2)

Having regard to the Treaty establishing the European
Community,

Having regard to the Agreement on the European Economic
Area, and in particular Article 57(2)(a) thereof,

Having regard to Council Regulation (EEC) No 4064/89 of 21
December 1989 on the control of concentrations between
undertakings (1), as last amended by Regulation (EC) No 1310/
97 (2), and in particular Article 8(2) thereof,

(3)

Having regard to the Commission's decision of 26 May 2000
to initiate proceedings in this case,

Having regard to the opinion of the Advisory Committee on
Concentrations (3),

Whereas:

(4)

(1)

On 18 April 2000, the Commission received a notifica-
tion pursuant to Article 4 of the Regulation (EEC) No
4064/89 (the Merger Regulation) by which the Boeing
Company (‘Boeing’ or ‘the notifying party’) acquires
control within the meaning of Article 3(1)(b) of the
Merger Regulation the satellite prime contracting and
equipment business of Hughes Electronics Corporation
(Hughes).

(1) OJ L 395, 30.12.1989, p. 1 (corrected version in OJ L 257,

21.9.1990, p. 13).

(2) OJ L 180, 9.7.1997, p. 1.
(3) OJ C 53, 28.2.2004.

By decision dated 26 May 2000, the Commission found
that the notified operation raised serious doubts as to its
compatibility with the common market and initiated
proceedings pursuant to Article 6(1)(c) of the Merger
Regulation and Article 57(2)(a) of the EEA Agreement.

I. THE PARTIES

Boeing is a Delaware corporation operating in the field
of commercial aircraft, defence and space industries,
including the production and launch of
satellites.
Boeing's satellite business involves primarily the manu-
facture of global positioning systems (GPS) navigation
satellites for the United States Department of Defence.
Boeing provides satellite launch services for commercial
customers worldwide as well as for the United States
Delta
its
Government
programme. Boeing is also a minority shareholder
through a 40 % interest
launch service
provider named Sea Launch. The Sea Launch joint
venture started operations in 1999.

wholly-owned

in another

through

(HSC),

Hughes is a US-based subsidiary of General Motors,
active in satellite-based services (including communica-
tions services and pay-TV), and satellite manufacturing.
Hughes' satellite prime contracting and equipment busi-
ness consists of Hughes Space and Communications
Company
and
Spectrolab Inc.
Hughes Electron Dynamics (HED): HSC designs and
manufactures communication satellites for commercial
customers worldwide as well as for the US Department
of Defence and NASA, while Spectrolab and HED
produce components primarily for use in satellites (such
as solar cells, solar panels, travelling wave tubes and
batteries).

(Spectrolab)

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(5)

(6)

(7)

(8)

(9)

II. THE OPERATION

On 13 January 2000, Boeing, Hughes and HSC entered
into a Stock Purchase Agreement, according to which
Boeing will acquire: (a) all outstanding shares of HSC; (b)
all outstanding shares of Spectrolab;
(c) the assets of
HED; (d) 2,69 % of the issued and outstanding shares of
common stock of ICO Global Communications (Hold-
ings) Ltd, currently held by Hughes; and (e) 2 % of the
issued and outstanding shares of common stock of
Thuraya Satellite Telecommunications Private Joint Stock
Co. currently held by Hughes.

In addition, the shares of the Hughes group in a research
joint venture with Raytheon (HRL) will be transferred to
Boeing, if the consent of Raytheon is obtained. If not,
Hughes and Boeing intend to form a joint venture to
enable Boeing to benefit from the research and develop-
ment activities of HRL.

The Hughes Group will retain its ownership in all its
other businesses, in particular, Hughes Network Systems,
PanAmSat and DirecTV.

In the light of the foregoing, the proposed transaction
constitutes a concentration within the meaning of
Article 3(1)(b) of the Merger Regulation.

III. COMMUNITY DIMENSION

The notifying party considers that the present transac-
tion does not have a Community dimension and there-
fore falls outside the jurisdiction of the Commission
because HSC does not meet the EEA turnover thresholds
laid down in the Merger Regulation. According to the
turnover
party, HSC's Community-wide
notifying
amounted to EUR […] (*) million in 1999 and EUR
[…]* million in 1998.

(10) However, HSC had significant turnover (approximately
EUR […]* million in 1999) with ICO Global Communi-
cations (Holdings) Ltd (ICO).
ICO was established to
provide global mobile personal communication services
by satellite. The ICO company filed for Chapter 11
protection (US procedure for companies facing bank-
ruptcy) in August 1999 and has recently been reorga-
nised. Boeing submits that the only way that HSC might
be considered to exceed the EEA turnover threshold
would be if its sales to ICO were to be included in its
EEA turnover.

(*) Parts of this text have been edited to ensure that confidential infor-
mation is not disclosed; those parts are enclosed in square brackets
and marked with an asterisk.

(11) Given that ICO is registered in the Cayman Islands but is
actually managed in London, whether ICO should be
seen as a Community company is decisive in deter-
mining whether or not the proposed transaction has a
Community dimension. If HSC's turnover with ICO is
allocated to the EEA, then the transaction falls under the
Merger Regulation. The notifying party however main-
tains that HSC's turnover with ICO should be allocated
to the Cayman Islands.

(12) On that basis, the Commission requested further infor-
mation from ICO, which replied on 29 February 2000.
It appears that ICO was formed as a result of a project
established by Inmarsat (an international organisation
based in London, which has now become a UK-listed
company) to offer worldwide data and voice communi-
cation services through the use of a satellite-based tele-
communication network. For that purpose,
ICO was
incorporated in 1994 in England and Wales. This
company was subsequently liquidated and the assets
were transferred to a Cayman Island company, which
itself was changed into a Bermuda company. However,
these changes, which seem to have primarily been made
for tax purposes, have not altered the management
structure of the company. As ICO has formally stated, its
principal place of business is in London, where all ICO's
day-to-day management is carried out and where 73 %
of
the remainder being
is located,
spread in several locations around the world. In the light
of the foregoing, it appears that, formally speaking, the
parties are correct in claiming that ICO is a Cayman
Islands (or more precisely a Bermuda Islands) registered
company but that, economically speaking, ICO is still
clearly a United Kingdom based company.

ICO's personnel

(13)

(14)

In the calculation of turnover for the purposes of the
Merger Regulation, it is the economic reality of a situa-
tion that should be taken into account. Indeed, para-
graph 7 of the Commission Notice on calculation of
turnover (1) states that ‘the set of rules [concerning the
calculation of turnover] are designed to ensure that the
resulting figures are a true representation of economic
reality’. In this case, therefore, HSC's turnover with ICO
should be allocated to the United Kingdom.

it appears

that, although the satellite
Furthermore,
contract between HSC and ICO is formally placed with
the Cayman Islands company, it was finally negotiated
by ICO's London staff, and that any important modifica-
tions to this contract would be negotiated in London. If
account is also taken of the place where the transaction
was in reality carried out, and therefore where competi-
tion between HSC and other satellite prime contractors
took place, it clearly points to the United Kingdom.

(1) OJ C 66, 2.3.1998, p. 25.

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Following the guidelines in paragraph 7 of the Notice on
the calculation of turnover, HSC's turnover with ICO
should therefore be allocated to the United Kingdom and
included in its EEA turnover.

(20)

satellite product
The notifying party submits
markets are distinguishable on the basis of two charac-
teristics: (i) the type of customer, and (ii) the satellite
orbit.

that

(15)

(16)

than

of more

Boeing and HSC have a combined aggregate worldwide
EUR 5 000 million (1)
turnover
(EUR 53 403 million for Boeing
in 1999 and
EUR 2 136 million for Hughes in 1999). They each
have an aggregate Community-wide turnover in excess
of EUR 250 million (EUR […]* million for Boeing in
1999 and EUR […]* million for Hughes in 1999) and
neither of the undertakings concerned achieves more
than two-thirds of its aggregate Community-wide turn-
over within one and the same Member State. The noti-
fied operation therefore has a Community dimension
within the meaning of Article 1(2) of the Merger Regu-
lation.

IV. COMPATIBILITY WITH THE COMMON MARKET

(17)

The merged entity will be active in the manufacture of
satellites and equipment, and the provision of satellite
launch services. In its decision of 26 May 2000, the
Commission identified serious doubts that the operation
would create or strengthen a dominant position by HSC
on the market
for commercial GEO communication
satellites, and could create a dominant position on a
market for commercial satellite launches.

(18) However, the results of the detailed investigation carried
out by the Commission demonstrate that,
the
reasons indicated in sections A and B below, there are
no competition concerns about these markets.

for

A. Satellites

(23)

Relevant product markets

(19)

Satellites are complex spacecraft orbiting or revolving
around a celestial body. Satellites may be used for
various applications (communications, navigation, obser-
vation and scientific purposes), for civilian as well as
military customers.

(1) Turnover calculated in accordance with Article 5(1) of the Merger
Regulation and the Commission Notice on the calculation of turn-
over (OJ C 66, 2.3.1998, p. 25). To the extent that figures include
turnover for the period before 1 January 1999, they are calculated
on the basis of average ECU exchange rates and translated into EUR
on a one-for-one basis.

(21)

(22)

Boeing considers that civil satellites sold to commercial
customers, civil satellites sold to government, and mili-
tary satellites, constitute each a distinct product market.
First, government satellites belong to a different product
market than commercial satellites since they are typically
specialised products, in contrast to commercial satellites
which are often derivatives of previous satellites. These
differences create different conditions of competition
between commercial satellites and government satellites:
competition in the commercial arena is focussed on
‘mass production techniques’, while competition in
government markets is based on a higher degree of
specialisation and customer involvement. Secondly, mili-
tary satellites form a specific product market because
they have uniquely rigorous equipment requirements,
resulting in tighter product specifications, tougher test
programmes and specialised components not used in
other satellites.

Boeing also submits that geosynchronous orbit (GEO)
satellites and non- geosynchronous orbit (NGSO, i.e. low
earth orbit (LEO) and medium earth orbit (MEO)) satel-
lites belong to different product markets, because, from
a demand side perspective, each type of orbit has distinct
advantages and disadvantages making each type inher-
ently better suited for different use (for example, being
closer to the earth makes a LEO satellite more appro-
priate for high resolution sensing uses). Also, on the
supply side, the time necessary to prove the technical
capability to build a satellite with a different orbit may
be three to five years. In particular, GEO satellites are
much more expensive (USD 100 million for GEO satel-
lites, as compared to USD 10 million for LEO satellites),
complex, heavy and long-lasting than NGSO satellites.

In previous decisions (2),
the Commission primarily
segmented the satellite sector by application, establishing
a distinction between communication (and possibly navi-
gation) satellites on the one hand, and observation and
scientific satellites on the other hand, because of differ-
ences in the technological skills and know-how required
for these various applications. The Commission also
suggested that there could be distinct product markets
(essentially
for military satellites and civil
because the conditions of competition are different
between military and civil applications), and that a
further segmentation by orbit type could be taken into
type
account. A further distinction by
(commercial operator or government) was also taken
into account, albeit for the purposes of the geographic
market definitions.

customer

satellites

(2) See,

for

example, Case COMP/M.1636-MMS/DASA/Astrium,

Commission Decision of 21 March 2000 — not yet published.

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(24)

that

The results of the Commission enquiry generally confirm
(a) that satellites used for communications, navigation,
and observation and scientific purposes belong to
distinct product markets;
the conditions of
(b)
competition for commercial satellites, civil government
satellites and military satellites are different; and (c) that
a distinction should be made between GEO and NGSO
satellites, although this segmentation may be more rele-
vant in the case of communication satellites than in
observation or scientific satellites (because most observa-
tion and scientific satellites are NGSO, and also probably
because, in view of the specificity of each observation
and scientific satellite, having existing designs or past
experience within a given orbit type may be less impor-
tant than in ‘mass produced’ communication products).

(25) However, it appears from the parties' estimates that all
commercial GEO satellites are communication satellites,
and that nearly all commercial NGSO satellites also are
communication satellites. Accordingly, whether commer-
cial satellites are further segmented by application (for
example, communication, navigation, observation and
scientific satellites) does not affect the competitive assess-
ment of the proposed concentration.

(26)

for the purposes of this case,

Furthermore,
it is not
necessary to further delineate the relevant product
markets for satellites because,
in all alternative market
definitions considered, effective competition would not
be significantly impeded in the EEA or any substantial
part of that area.

Relevant geographic markets

(27)

(28)

that

The notifying party submits
for
commercial satellites are worldwide. This is in line with
previous Commission decisions (1) [for example], and
has been broadly confirmed by the results of
the
Commission enquiry.

the markets

regional.

In the Astrium decision (2),

Boeing also submits that the geographic markets for
government (civil and military) satellites are national or
the
at most
Commission concluded that there is a western Euro-
pean (3) market for satellites procured by space agencies,
because, in that area, institutional satellites are primarily
purchased by the Europan Space Agency (ESA), whose
procurement
to a geographic ‘juste retour’
principle. Furthermore, the Commission indicated that
there might also be national markets for institutional
satellites in those Member States where national space
agencies apply similar procurement procedures. Finally,

is subject

the Commission suggested that there could be a world-
wide market
for military satellites procured through
competitive processes involving prime contractors in the
Community and the United States, but
there
appeared to remain national markets in those Member
States where satellites are procured from domestic prime
contractors only. However, for the purposes of this case,
it is not necessary to further delineate the geographic
markets for government
(civil and military) satellites
because, in all geographic market definitions considered,
effective competition would not be significantly impeded
in the EEA or any substantial part of that area.

that

Competitive assessment

(29) HSC and Boeing both operate as satellite prime contrac-
tors. However, the operation will not lead to direct over-
laps between the parties, since only HSC is active in the
commercial area, and neither HSC nor Boeing has
supplied government GEO or NGSO satellites to Euro-
pean customers. In addition, it should be noted that the
satellites of Boeing and HSC are used for different appli-
cations (respectively communication for HSC, and navi-
gation for Boeing) and have different sizes and orbits
(respectively GEO and MEO satellites for HSC, and LEO
satellites for Boeing).

(30)

In that context, the notifying party maintains that there
are no horizontally affected markets. However, given
HSC's market share in commercial communication satel-
lites, it is necessary to examine whether the addition of
Boeing's satellite business will strengthen HSC's present
strong position, in particular on the market for commer-
cial GEO satellites.

M a r k e t c h a r a c t e r i s t i c s

(31)

Commercial GEO communication satellites are large
satellites (over half GEO payloads exceed 9 000 lbs.)
placed in geosynchronous orbit, where they support
various services such as telephony, data transmission,
broadcast and cable television, and direct broadcast
services.

(1) See Case IV/M.437-Matra Marconi Space/British Aerospace Systems,
paragraph 22, Commission Decision of 22 August 1994 and Case
COMP/M.1636-MMS/DASA/Astrium.

(2) See Case COMP/M.1636-MMS/DASA/Astrium.
(3) For the purpose of this case, western Europe means the EEA and
Switzerland (and therefore includes all the Member States of the
European Space Agency).

(32) Demand is generated by commercial satellite operators,
which may be large international
institutions such as
Intelsat or Inmarsat or private companies, and which
either provide the end services themselves or lease satel-
lite capacity to service operators such as television
telecommunication compa-
broadcasting corporations,
nies, etc.

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(33)

(34)

It appears from the Commission investigation that satel-
lites are almost always procured through international
competitive bidding procedures involving several satellite
prime contractors, such as HSC, Space Systems/Loral
(SS/Loral), Lockheed Martin, Alcatel Space Industries
(Alcatel) or Astrium. In view of the considerable losses
of revenue (up to one million dollars per day) caused by
a satellite failure, it also appears that the selection of the
satellite prime contractor
is primarily based on its
proven reliability and price, with the satellite durability
and the manufacturing lead times also playing an impor-
tant role.

In view of the advent of smaller, NGSO satellite constel-
lations also offering communication services (such as
mobile telephony, paging, data transmission and remote
messaging), and of the filling-up of spots and orbital
slots used by GEO satellites, the GEO satellite market is
expected to evolve in the following three directions: (i)
levelling, or even reduction in the number of satellites
ordered; (ii) increase in satellite average mass and power;
and (iii) focus on broadband services (not economically
supported by smaller satellites).

PanAmSat, DirecTV and Hughes Network Systems), HSC
could be viewed both as a major supplier and a major
competitor of its customers. Internal documents from
the parties suggested that this led a significant propor-
tion of satellite operators not to purchase from HSC.

(38)

Consequently, it was considered that HSC's competitive
position was better indicated by its success rate when
bidding for contracts, which is [between 40 % and
60 %]*. Third parties explicitly indicated that
they
viewed HSC as having a dominant position on the
commercial GEO communication satellite market.

(39) Despite the absence of overlaps between Boeing and
HSC in the satellite markets, the Commission also found
indications that the operation could strengthen HSC's
market position. First, it was concluded that the elimina-
tion of the link between HSC and the Hughes group
would enable HSC to address the whole market, and so
lead HSC to win market share (possibly up to its
[between 40 % and 60 %]* success rate).

M a r ke t p la ye r s

(35) GEO communication satellites are primarily offered by
five satellite prime contractors in the United States or in
Europe, namely HSC, SS/Loral, Lockheed Martin, Alcatel
and Astrium. All five producers appear to manufacture
GEO as well as NGSO communication satellites, for use
by both government and commercial customers.

(36)

Based on the average commercial GEO communication
satellite orders since 1997, HSC has a market share of
[between 35 % and 45 %]* followed by Lockheed Martin
[between 25 % and 35 %]*, Alcatel [between 10 % and
20 %]*, SS/Loral [between 10 % and 20 %]* and Astrium
[between 0 % and 10 %]*.

(40)

(41)

Impact of the oper a tion

Secondly, it was indicated that satellite prime contractors
currently procured certain satellite equipment (namely
solar cells, battery cells and travelling wave tube ampli-
fiers) from Hughes (especially Spectrolab and HED). In
that context, third parties expressed concerns that, after
the proposed transaction,
the equipment concerned
could be procured by Boeing for its own satellites,
which would reduce the capacity available to third
parties to such an extent as to weaken them with regard
to HSC.

In the light of the above, the Commission therefore
considered that the operation might further enlarge the
gap between HSC and its competitors. In view of the
apparent presence of economies of scale in satellite
manufacturing (due to the fact that the amortisation of
sunk costs accounts for a significant share of the satellite
costs), it was feared that this could create or strengthen a
dominant position by HSC in the GEO satellite market.

(37)

In its decision of 26 May 2000, the Commission found
indications that HSC's market share could underestimate
its actual position on the market. First, third parties had
indicated that HSC benefited from a number of competi-
tive advantages over other satellite prime contractors,
primarily a reputation of excellence and reliability
superior to that of its competitors, and lower costs due
to higher sale volumes (both in the commercial and mili-
tary sectors). Secondly,
it appeared that HSC's success
could be limited by the fact that, because it belongs to
the Hughes group which is vertically integrated into the
satellite operation (through
downstream sector of

(42) However, the results of the Commission's detailed inves-
tigation indicate that the operation will not create or
strengthen a dominant position. First, it should be noted
that satellite markets are bidding markets, where the
competition are determined by the
conditions of
presence of credible alternatives to HSC's products. In
that context, and given the market positions of Lockheed
Martin [between 20 % and 40 %]*, SS/Loral [between
10 % and 20 %]* and Alcatel [between 10 % and 20 %]*,
it would appear that HSC remains subject to competition
from other large and credible prime contractors.

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it appears from the results of the Commis-
Secondly,
sion's investigation that HSC's alleged competitive advan-
tages have probably been overestimated. For instance,
most customers indicated that they did not view HSC
satellites as being more reliable than those of other satel-
lite prime contractors, and a number of third parties
specified that,
although HSC satellites historically
enjoyed a superior reputation of excellence and relia-
bility, they too have experienced a number of failures in
recent years. Similarly, most customers indicated that
they did not consider HSC to have any substantial cost
advantage over
taking into
account the main evaluation criteria used by customers,
HSC seems not to be considered the best offer in a
majority of cases. The presence of credible alternatives
to HSC's satellites is further confirmed by the fact that
HSC only won […]* of the 29 satellites ordered since
the beginning of 2000. In the light of the foregoing, it
can therefore be concluded that HSC does not have a
dominant position in the commercial GEO satellite
market.

its competitors. Finally,

(43)

(44)

there is no indication that, after

Furthermore,
the
proposed concentration, Boeing's purchases from Spec-
trolab and HED would reduce these suppliers' incentives
to supply solar cells, battery cells and travelling wave
tube amplifiers to other prime contractors. This is clear
for travelling wave tube amplifiers, since Boeing does
not purchase those products. This is also true for solar
cells and battery cells, because HSC seems to have
the equipment
substantial overcapacity for most of
concerned, which would not be filled even taking into
account all of Boeing's potential demand, particularly as
Boeing already purchases most of its solar cells from
Spectrolab and does not buy travelling wave tube ampli-
fiers. Secondly, solar cells and battery cells are essentially
standardised products, which could competitively be
procured from alternative sources of supply. Thirdly,
most (including the largest) prime contractors currently
do not purchase equipment from HSC, so that even a
reduction of HSC's supplies to third parties would not
create competition concerns.

(48)

(49)

(45)

satellite operators

The Commission investigation also shows that, despite
Hughes' ownership of
(namely
PanAmSat, DirecTV and Hughes Network Systems), the
fact that HSC could be viewed as both a competitor and
a supplier of third party satellite operators did not lead
most customers to refuse procuring satellites from HSC.
It follows that the operation should not substantially
bring new business to HSC satellites, and therefore
should not substantially create new opportunities for
HSC.

(46)

it appears that, by severing the link between
Instead,
HSC and Hughes'
companies
satellite
(PanAmSat, DirecTV and Hughes Network Systems), the
transaction would probably make these satellite opera-
tors more open to other prime contractors. Given that

operating

the purchases of Hughes' satellite companies have repre-
sented approximately [35 % to 45 %]* of HSC's satellite
orders between 1997 and 1999, the proposed operation
could therefore substantially weaken HSC's competitive
position rather than strengthen it.

(47)

In the light of the foregoing,
it is concluded that the
operation will not create or strengthen a dominant posi-
tion on the satellite markets as a result of which effective
competition would be significantly impeded in the EEA
or any substantial part of that area.

B. Launch services

Relevant product markets

Launch vehicles are used to deliver satellites to space
orbit. The services involved in launching satellites into
In
orbit are referred to as satellite launch services.
general, two types of launchers can be distinguished:
expendable launch vehicles which are consumed during
fully reusable
the launch process, and partially or
launchers. However,
launch services are
in practice,
conducted almost exclusively by expendable launch vehi-
cles.

Expendable launch vehicles may be categorised into
various product groups, depending on the payload mass
that the launcher is able to deliver in orbit. In particular,
Boeing submits that LEO and MEO satellites can be and
launch vehicles
are launched on a wide range of
(including larger and smaller launchers), but that inter-
mediate/heavy GEO satellites (that is, those with a mass
in excess of 4 000 pounds or approximately 1 800 kg)
can only be launched by certain, larger launch vehicles
(hereinafter referred to as heavy lift launchers). Accord-
there are two product
ingly, Boeing suggests
that
markets:
services
launch
comprising all satellite launches, and a ‘nested’ market
for
intermediate/heavy GEO satellite launch services
(only performed by heavy lift launchers).

an overall market

for

(50)

The Commission enquiry broadly supports the view that
launchers are part of a specific product
heavy lift
market, because only they are capable of
launching
larger satellites into GEO. This is in line with the conclu-
sions of the Commission in previous decisions (1), where
the launch
it was suggested that a segmentation of
service sector according to the size of
the satellite
launched or the capability of the launcher may be appro-
priate for the purposes of product market definition.

(1) See Case IV/M.1564 — Astrolink, Commission Decision of 25 June

1999 and Case COMP/M.1636-MMS/DASA/Astrium.

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(51) However, first, there appears to be a contradiction in
Boeing's proposed market definitions. If one accepts that
intermediate/heavy GEO satellites can only be launched
by heavy lift launchers, then the launch of these inter-
mediate/heavy GEO satellites is not substitutable with
launch service, and therefore cannot be
any other
included in a broader product market. In that context,
there cannot be an overall product market comprising
all satellite launches. A more consistent approach would
following two product
consist
markets: a market for launch services of all satellites but
intermediate/heavy GEO satellites, and a market
for
intermediate/heavy GEO satellite launch services.

in considering the

on the competition assessment, since it would appear
that the average mass of GEO satellites is 6 000 lbs. (and
rising), and that 75 % to 90 % of all GEO satellites fall
within the intermediate/heavy category.

(55) However, for the purposes of this decision,

it is not
necessary to further delineate the relevant product
markets for launch services, since, in none of the alterna-
considered, would effective
tive market definitions
competition be significantly impeded in the EEA or any
substantial part of that area.

(52)

(53)

Furthermore, third parties have expressed criticisms over
the notifying party's proposed product market definition
for intermediate/heavy GEO satellite launch services.
According to them, contrary to Boeing's proposal, the
product market segmentation should not be based on
the satellite size and orbit, but on the launch vehicle
category. These third parties consider that the services
offered by heavy lift launch vehicles are not substitutable
with those offered by other launch vehicles, whatever
the size and orbit of the satellite concerned. For instance,
it would appear that certain NGSO satellites are capable
of being launched by the larger launch vehicles only.

In that case, the ‘nested’ product market should refer to
the launch services offered by large/intermediate launch
vehicles. This alternative market would comprise all
satellite launches performed by heavy lift launchers, and
would therefore be broader in scope than the large/inter-
mediate GEO satellite launch services as proposed by
Boeing (which does not include the NGSO satellite or
smaller GEO satellite launches performed by heavy lift
launchers). This alternative market definition would have
the advantage of providing a more accurate picture of
the
launchers,
because it would include all of the launches performed
by these launchers. On the other hand, it would mean
that the heavy lift launch vehicles are not in competition
with smaller vehicles even for smaller satellite launches,
which has not been demonstrated.

the different

competitive

stance of

(54) Other third parties accepted Boeing's proposal

for a
specific product market
for intermediate/heavy GEO
satellite launch services, but criticised the dividing line
for intermediate/heavy GEO satellites (4 000 lbs.). In par-
ticular,
it was suggested that there is no strict limit
between ‘small’ and ‘large’ satellites, and that the border-
line could have been defined specifically for the purpose
of excluding Boeing's Delta II launcher from the nested
it is doubtful whether the
product market. However,
selection of another borderline would have much effect

(56)

(57)

(58)

(59)

Relevant geographic markets

submits

Boeing
and commercial
that government
launches belong to different geographic markets. The
geographic markets for launch services are worldwide in
the case of commercial applications, but are national or
regional
in the case of government (civil or military)
launches. This difference is due to the fact that, as is the
case with satellites, governments tend to give strong
preference to national or at least regional launch service
providers where applicable.

This is in line with the Astrolink decision where the
Commission concluded that commercial launches had to
be distinguished from captive military or other govern-
mental launches (which are ordinarily not available for
open competition, even though the vehicles used are
similar). These definitions have also been broadly
confirmed by the results of the Commission investiga-
tion.

Competitive assessment

Boeing is active in launch services, where it operates the
Delta range of launchers (Delta II, Delta III and, as of
2001, Delta IV). The Delta II launcher has been reported
to be the commercial
launch vehicle with the longest
heritage and the highest number of flights. It enjoys an
excellent reputation of reliability, but is limited by its
lift-off capacity (4 000 lbs.) which is insufficient
for
most commercial GEO satellite missions. The new Delta
III and the future Delta IV will support much higher
payload capacity, but Delta III is currently handicapped
because it has only had one successful flight out of its
three first launches, while Delta IV is still at development
stage, and therefore has never flown to date.

Boeing also has a 40 % stake in Sea Launch, a multi-
national partnership with the Russian company RSC-
Energia
as with Norwegian-based
Kvaerner Maritime (20 %) and the Ukrainian company
Yuzhnoye/PO Yuzhmash (15 %). Sea Launch operates

as well

(25 %),

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the Ukrainian-built Zenit 2 vehicle (using the Block DM
upper stage manufactured by Energia), which it launches
from a marine platform that travels from California to
equatorial waters. Sea Launch had its first launch in
March 1999.
Its reliability is also questioned by the
failure of its third flight.

operator places two contracts: one contract (with the
satellite prime contractor) for the supply of the satellite,
and one contract (with the launch service operator) for
the provision of the associated launch service.

(60)

Boeing submits that its 40 % interest in Sea Launch does
not confer control over Sea Launch, on the grounds that
there is no common marketing or management of the
Delta and Sea Launch programmes. However, it appears
that Boeing has veto rights over a number of strategic
decisions by Sea Launch, including amendments to busi-
ness plans (which require unanimity of the partners), the
appointment of officers and contracts with third-party
customers and major suppliers (which require a 67 %
majority). In addition, Boeing has nominated three of
the five Sea Launch officers (namely the President and
for Corporate
General Manager,
Affairs and Secretary, and the Vice-President
for the
Launch Segment). Consequently,
is concluded that
Boeing has joint control over Sea Launch.

the Vice-President

it

(61) HSC is not active in launch services, but, as indicated in
paragraph 36, it is the largest supplier of those commer-
cial GEO satellites to be delivered into orbit by launch
vehicles. It is therefore necessary to examine whether the
combination of HSC' and Boeing's positions on these
complementary markets could create or strengthen a
dominant position in launch services.

(62)

The
investigation carried out by the Commission
confirms that nearly all customers attach a great deal of
importance to the selection of the launch vehicle that
will eventually send their satellite into space. Reliability
and proven performance are the most important criteria
in the eyes of the customers when it comes to judging
and rating potential launch service operators. According
to the results of the customer survey, price is always
taken into account by customers when making their
final choice. However, customers also clearly indicate
that securing their launch is paramount and, for that
reason, they are ready to pay more in order to avoid any
failure that would harm their company both financially
and commercially. Eventually,
the size of the launch
service provider does not appear to be a critical factor
based upon which the satellite customers will make their
final decision.

(64) However,

in recent years, satellite prime contractors
have increasingly offered (and customers have increas-
ingly accepted or requested) a new type of contract
known as Delivery In Orbit (DIO). In that type of situa-
tion, the customer orders a complete package from the
satellite manufacturer who, under the terms of a single
contract, is required to supply both the satellite and the
launch service. The DIO provider consequently bears
responsibility for the arrangement of the satellite launch.

(65)

(66)

the responsibility of

The advantage of DIO procurement is that it simplifies
the relationships with the prime contractor. Insofar as,
in a DIO contract,
the satellite
delivery and launch is transferred to the satellite prime
contractor, DIO procurement also avoids the customers
having to deal with a number of risks such as delays,
satellite/launcher interfaces or compatibility issues etc.
linked to the interrelationships between the satellite and
the launch service contracts. Conversely, DIO contracts
appear to reduce the customer's visibility on the contract
progress and on the choices performed by the satellite
prime contractor (including those for the launch opera-
tions). Customers have indicated that DIO procurement
may be more expensive than DOG. As a result, DIO
seems to be primarily chosen by those smaller customers
lacking the internal resources necessary for the manage-
ment of the DOG process.

the selection of

In either procurement process,
the
launch service operator is carried out through an inter-
national competitive bidding procedure involving the
main launch service operators worldwide. Insofar as any
delay or failure would lead to considerable losses of
revenues (up to one million dollars per day) for the satel-
lite operator, and as no insurance seems to cover such
risks, it appears from the Commission investigation that
the selection of the launch vehicle is primarily based on
reliability and price, with launch schedule flexibility also
playing an important role.

M a r ke t c h a r a c t e r i st i c s

Procurement process

Integration between the satellite and the launch
vehicle

(63)

Launch services are usually purchased separately from
the satellite concerned. In that type of situation (known
the satellite
as Delivery on the Ground or

‘DOG’),

(67)

In order to be successfully launched into space,
the
compatibility of a satellite with a chosen launch vehicle
has to be ensured. This can be achieved on a case-by-
case basis, but can also be secured either by the outcome
of previous launches or by compatibility agreements.

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(68)

In the context of DOG procurement, customers generally
send out requests for proposals to both satellite prime
contractors and launch service operators. These requests
may be in parallel or phased, depending upon the
customer. At that stage, customers generally select the
satellite manufacturer, and pre-select several possible
launch vehicles. In general, the selection of the satellite
is made 24 to 36 months before the launch date, and
the satellite contract is signed before the final selection
of the launch service supplier. In that context, and in
order to keep their options open for the ultimate selec-
tion of the launch vehicle, customers usually require the
satellite manufacturer to maintain compatibility with
several launch vehicles (which may or may not be identi-
fied).

(69) After contract award, and although in principle it is the
satellite that needs to be made compatible with the
launcher and not the reverse, both the launcher and
satellite manufacturers need to cooperate in order to
have the satellite integrated to the selected launch
In that context, a broad variety of tests and
vehicle.
analyses need to be carried out both by the satellite
manufacturer and the launcher, so as to ensure, inter alia,
the mechanical, thermal, electrical, radio frequency and
electromagnetic compatibility between the satellite and
the launcher environment.

(70)

(71)

Those tasks are performed on a case-by-case basis, for
each individual satellite. However, given that satellite
manufacturers usually design their commercial commu-
nication satellite around a limited number of ‘standard
platforms’, it is also possible to provide for the general
compatibility of
families of satellites. This is secured
through broader ‘compatibility agreements’ between the
satellite manufacturer and the launch service provider,
covering a whole family of satellites. In practice, satellite
manufacturers and launch service providers agree on a
generic ‘envelope’ platform, the compatibility of which
with the launch vehicle concerned is ensured. It is then
considered that satellites falling within that platform will
launch vehicle
compatible with the
generally be
concerned. Compatibility agreements therefore reduce
the risks, workload and time required for the integration
of specific satellites belonging to a broader family with a
given launch vehicle.

launch vehicle. Subject

The closer to the anticipated launch, the more expensive
it may be to make the necessary technical changes to
accommodate a different
to
contract arrangements between the parties, customers
can be liable to pay termination fees in an increasing
amount as the launch date draws closer. Although some
of the customers who answered the Commission's inves-
tigation argue that
they have complete freedom to
change either element of the chosen combination, custo-
mers, in general, confirm that the earlier modifications
are brought to the programme, the better it is for all
parties involved.

(72)

(73)

(74)

Excess capacity

It is generally considered that the commercial
launch
service industry is currently suffering from excess capa-
city. This situation appears to result
from the over-
investment
into launch vehicle capacity which took
place in the second half of the 1990s following opti-
mistic anticipations of the launch market volume. In par-
ticular, it was generally expected that the development
in a
of NGSO satellite constellations would result
soaring demand for launch services. For instance,
in
1997, Boeing forecast that around […]* satellites would
be launched in 2002. Given that such demand could
launch service
hardly be met by the existing capacity,
operators actively invested into new facilities and often
new launch vehicles. However, now that
the first
systems launched (such as Iridium or ICO) have met
financial difficulties, the projects for satellite constella-
tions have been substantially reduced or delayed, and
launch forecasts have therefore become far more conser-
vative. For instance, in the autumn of 1999, the revised
predictions for launch services in 2002 were brought
down to just […]* satellites.

The considerable difference between the initial forecasts
and the actual situation, combined with the important
investments into new facilities and launch vehicles, has
resulted in a situation of substantial excess capacity in
the launch service industry. For instance, the combined
capacity of the three main launch vehicles (Delta, Atlas
is expected to exceed 50 units per year.
and Ariane)
is to say potentially up to twice the current
That
commercial market volume. Taking into account
the
presence of other launch vehicles (such as Proton, Sea
Launch, Great Wall (China) and Starsem), and despite
launches for government
the presence of additional
satellites,
that capacity may be
twice as high as total demand.

these figures suggest

The industry's excess capacity affects the cost structure
of most launch service operators as their lower than
expected actual sales volumes approach their operations'
break-even points. The high level of fixed costs that
characterises the industry requires a significant number
of launches in order to be amortised. This makes launch
providers very dependent on winning commercial
launch contracts as each individual contract is of impor-
tance when it comes to price competitiveness. Losing
two contracts can amount to a loss of 20 % to 25 % of
the annual sales volume of some launch service provi-
ders and therefore seriously jeopardise their profitability.

M a r k e t p l a y e r s

(75)

The market leaders in commercial launch services have
traditionally been Arianespace and International Launch
respectively represented
Services
around [between 30 % and 50 %]* and [between 30 %

(ILS), which have

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and 50 %]* of commercial intermediate/heavy GEO satel-
lite launches over the last three years. Boeing's Delta III
launches, the first two of which failed, Great Wall and
Sea Launch account for the remaining few launches.

(76)

ILS is a joint venture between Lockheed Martin and
Krunichev, responsible for the marketing of the Atlas
and the Proton ranges of launch vehicles to customers
other than the US Government. The Atlas launchers are
designed and built by Lockheed Martin. The Atlas range
currently includes two families, the Atlas II launchers
and the new Atlas III vehicle (which made its first
commercial
launch
vehicle (to be called Atlas V)
is also currently being
developed. The Proton vehicles are designed, developed
and manufactured by the Russian firms Khrunichev and
Energia.

launch in May 2000). A newer

(77) Arianespace was created in 1980 as the first commercial
space transportation company. It is responsible for the
production, marketing and launch of the Ariane launch
vehicles, which are designed and developed through
programmes under the auspices of the European Space
Agency. Arianespace is held by 53 shareholders from 12
European countries. The current range of vehicles on
offer includes the Ariane IV launcher and the recent
Ariane V launcher, with newer, heavier versions of
Ariane V currently being developed.

(78)

Boeing and Sea Launch currently hold relatively limited
positions on the satellite launch services market. This is
due to a series of factors, but essentially stems from the
fact that Boeing's main launcher, Delta II, is not capable
of launching large satellites into space, and that the relia-
bility of Boeing's and Sea Launch's new and larger
launchers remains in doubt after recent failures. Custo-
mers confirm this situation in their responses to the
investigation conducted by the Commission. Although
Delta II is generally considered to be one of the most
reliable launchers, proven reliability of the other Boeing
launch vehicles are severely downrated by most of the
customers. In 1999, Boeing and Sea Launch collectively
accounted for 17 % of commercial
launches, behind
Lockheed Martin (25 %) and Arianespace (22 %). On the
intermediate/heavy GEO satellite launch
market
services, Boeing's position was lower, at 12 %, behind
Arianespace (44 %) and Lockheed Martin (44 %).

for

(79) Despite

the

apparent drawbacks

affecting Boeing's
present market position, it seems quite clear that Boeing
will become a major contender in launch services in the
next few years. This is further indicated by the success of
Delta III and Sea Launch's latest flights. Furthermore,
Boeing's next launch vehicle, Delta IV, which is due to
start operating in 2001, is expected to be the world's
largest launcher, and will probably have the possibility
to establish itself as a well-reputed and cost effective

launcher through its existing contract of around 20
guaranteed launches with the United States Government.
Boeing's capacity as a launch provider for commercial
satellites is also reflected by the fact that Delta III and
Sea Launch together already represent [between 25 %
and 40 %]* of commercial launches ordered from heavy
lift launchers since 1997, compared with [between 25 %
and 40 %]* for Arianespace and [between 15 % and
25 %]* for ILS.

(80) Other launchers, such as Japan's H2 vehicle, or China's
Long March programme, are also able to deliver large
GEO satellites into orbit. However, these vehicles do not
seem to constitute credible alternatives to the other
market players: the H2 launcher is severely disadvan-
taged by its launch failures, while Long March suffers
from both technological and export difficulties (it does
not appear to be able to launch US-based satellites,
because of the restrictions arising from the US satellite
export regime). It therefore appears that the only main
launchers capable of influencing the functioning of the
market for the launch of commercial intermediate/heavy
GEO satellites are Boeing, Sea Launch, ILS and Ariane-
space.

Impact of th e ope rati on

(81) Despite the absence of any overlap between Boeing and
HSC in launch services, the Commission has identified,
in its decision to initiate proceedings in this case, several
potential adverse effects that could result
from the
proposed transaction. Given that satellite manufacturing
and launch services are complementary goods, which are
both necessary for the satellite operators to have satel-
lites into orbit, and given HSC's strong position on the
market for commercial GEO satellites, it was feared that
the merged entity could induce satellite operators to
obtain their launch services on Boeing's launchers, and
consequently give Boeing a dominant position on the
market for larger satellite launches.

(82)

In particular, six potentially adverse effects of the trans-
action were identified:

(a) Satellite makers seem to bid to customers with a
mass margin. After the operation, HSC might design
this mass margin so as to optimally fit with the
payload capacity of Boeing's launchers. This might
make the offers of other launch service operators
less competitive than Boeing's.

(b) Some DIO contracts

satellite prime
give
contractor a certain flexibility as to the launch
vehicle to be used. After the merger, HSC might try
to have all those satellites launched on Boeing or Sea
Launch vehicles.

the

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(c) Launching a satellite requires prior integration work
between the satellite and the launcher concerned.
This integration may be performed on a case-by-case
basis, but it appears to be also possible to develop
general
the
launcher and the satellite family. After the proposed
transaction, HSC might
refuse to develop such
compatibility agreements, which would increase the
costs and time required for the integration of HSC
satellites with launchers operated by third parties.

compatibility

agreements

between

(d) HSC may refuse to provide third-party launch
service operators with information relating to its
next satellites or to satellite updates, so that those
launch service operators cannot easily make their
launchers compatible with those satellites.

(85) As indicated in paragraph 62, the results of the Commis-
sion's investigation show that customers devote a lot of
attention and care to the selection of the launch vehicle,
and usually consider reliability to be of paramount
importance when selecting the launch service operator.
This is so because of the risks incurred by customers in
case of a launch failure. In such a case, the customers
would not only lose a satellite (which they may insure),
but also all the revenues related to the operation of the
satellite until a new satellite is produced and launched
(which no insurer is apparently willing to cover). For
instance, customers indicated that a launch failure or
delay would cost them more than USD 1 million per
day in terms of lost revenue.

(e) As a satellite manufacturer, HSC receives competi-
tively sensitive information relating to the launch
vehicles with which its satellites will be integrated.
Although that information is usually protected by
confidentiality clauses, HSC might use it to the detri-
ment of third party launch service operators.

(86)

(f) In the longer term, HSC might design its next
generation of spacecraft so that they fit with Boeing's
launchers better
launchers. For
than with other
instance, HSC might impose unique and proprietary
interfaces for its satellites, so as to favour Boeing
launchers. HSC might also design its satellites so that
they can be launched in such a way that they last
longer than satellites usually do.

Effects of the identified behaviour

(83)

(84)

It appears that, although the behaviour described in
paragraph 82 might theoretically lead HSC's customers
to favour Boeing's launch vehicles, it could also under-
mine HSC's competitiveness on the satellite market. For
instance, making HSC satellites less compatible with
other launch vehicles, or increasing the cost of or
delaying the integration between a HSC satellite and a
third-party launch vehicle, could be a disadvantage for
HSC in respect of those customers requiring their satel-
lites to be integrated on other launch vehicles. In that
context, it is necessary to examine whether the merged
launch
entity would gain more through additional
service contracts than it would lose through lost satellite
contracts, if it were to engage in such behaviour.

To this effect, the Commission conducted an extensive
customer enquiry in order to check whether the various
concerns raised by third parties were confirmed and
could become a reality in the future. Both major and
small satellite customers were contacted and invited to
respond on their perception of the competitive situation
of the market. The effects of the proposed transaction,
not only on the market as a whole but also on custo-
mers' businesses, were also investigated in order to deter-
mine the likely impact of the competitive behaviour of
the players active on the defined market.

In that context, customers usually will not accept being
launched by a launch vehicle which they do not consider
to be sufficiently reliable. That is confirmed by the fact
that, after its first two failures, Boeing's Delta III launcher
could not find a commercial customer for its third flight,
and had to carry a dummy payload. More generally,
customers usually try to reduce the launch risks to the
minimum level possible, by requiring their satellite to be
compatible with a series of launchers to enable them to
switch launchers in case of doubts as to the reliability of
their selected vehicle, or by having specific clauses in
their contracts indicating, for instance, that their satellite
will not be the first payload to be launched after a
failure of any given launcher, or that the launcher will
have to achieve a given success rate in a given period
before it can be used for the delivery into space of the
satellite concerned. Customers with fleets of satellites
also usually spread their launches over a number of vehi-
cles, and often require to be able to switch between
launchers or add new launchers at their convenience.

(87)

The results of the Commission's investigation therefore
confirm that customers will not accept having the
choice of
launcher imposed on them, and that any
attempt by HSC to design satellites compatible with only
Delta or Sea Launch would meet with resistance from
customers. They also confirm that it would not be profit-
able for HSC to try to persuade customers to switch to
Boeing launchers through higher integration costs for
other launchers. This is so because most customers indi-
cated that, should the combination of an HSC satellite
and their preferred launch be more expensive than other
combinations,
they would either choose both their
preferred launcher and satellite and pay whatever is
reasonable for that selected combination, or choose the
cheapest combination of reliable launcher and satellite.
In that context, making the integration between HSC
satellites and non-Boeing launchers more difficult would
either have no impact on the customer choice, or would
make launcher combinations with HSC satellites rela-
tively more expensive than with other satellites, thereby
weakening HSC's competitive position in satellites.

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(88)

(89)

(90)

Furthermore, it should be noted that most of the custo-
mers who responded to the Commission investigation
indicated that
they retain the capability to change
launchers should they wish to do so. The costs of this
change would obviously increase as the launch date
approaches, but, in view of the losses incurred by custo-
mers in the event of a launch failure, it can be concluded
that customers would probably make use of that provi-
sion should they become dissatisfied with the reliability
or the service of their pre-selected launcher. Most custo-
mers also claimed to be in command of all steps of the
launch vehicle selection process and that, in any case,
the satellite manufacturer has either very little or no
in the final choice. This would also
influence at all
the possibility for the parties to lure
seriously limit
customers away from their preferred choice.

Furthermore, it should be noted that DIO customers do
not have a lower capability to independently select their
launch service operator
than DOG customers. First,
there is no indication that DIO customers could not
currently choose their DIO combination from other
satellite manufacturers than HSC. And secondly, experi-
ence shows that even DIO customers included contrac-
tual provisions for them to be able to change launchers
at their convenience.

it was feared that

It is true that,
in the past, most customers procuring
DIO services from HSC may have been launched on
launchers with which HSC had bulk-buy agreements.
However, it appears that the contracts concerned were
established at a time when, in view of very high market
volume anticipations,
the existing
launch capacity would be insufficient to meet demand,
and that therefore there would be a shortage of launch
services available. This led HSC to enter into bulk-buy
agreements with launch service operators, so as to
secure available capacity, and this also made DIO offers
based on those agreements both cheaper and safer than
other contracts. That is probably why so many DIO
contracts with HSC have been based on those launchers
with which HSC had bulk-buy agreements. There is no
indication that the same situation could be reproduced
now: first, recent failures appear to have made customers
reluctant to contract with those launchers; secondly, as
indicated in paragraphs 72, 73 and 74 above, the launch
service industry now suffers from substantial excess
capacity, so that prices on the spot market are now
lower
than the prices previously obtained by HSC
through its bulk-buy agreements, and launcher avail-
ability is no longer seen as a real concern.

(92)

(93)

(94)

a launch failure, than for large satellite operators with
several satellites in orbit. This suggests that, while larger
customers may have higher buying power than smaller
customers, smaller customers have stronger incentives to
carefully select their launch service operator and will
therefore be even more cautious when selecting their
launch vehicle and contracting their launch services.

In the light of the foregoing, it appears that, in the short
term, there is very limited scope for HSC to induce
customers to have their satellites launched by unproven
launch vehicles like Delta III and Sea Launch.
In the
longer term, there is a high probability that Boeing's
current problems of reliability in the launch service
supply will be resolved, and therefore that Boeing and
Sea Launch will be considered as suitable launchers by
satellite operators. This
indicated by the
is
success of the latest flights of Sea Launch and Delta III.
However, even in that case, it appears that the merged
entity will not be in a position to lead a substantial
number of customers to switch to Boeing or Sea Launch
vehicles if that were not their initial intention.

further

This is further indicated by the fact that even launch
service competitors who expressed concerns admit that,
in the absence of substantial market power on the satel-
lite markets, the effects identified in paragraph 82 could
not profitably take place. In addition, the Commission's
assessment of the satellite market is that HSC does not
have a dominant position in that market. This is also
confirmed by past experience.
Indeed, although Lock-
heed Martin engages both in satellite prime contracting
and in launch services operations, there is no indication
that it has been able to behave in the manner described
in paragraph 82 to its own advantage.

Consequently,
it can be concluded that, should the
parties engage in the above described behaviour, they
would essentially risk losing satellite sales, and any
possible effects would be insufficient to overturn the
current market situation, characterised by very strong
positions by both ILS and Arianespace. This is further
confirmed by the fact that ILS is also integrated in satel-
lite and launches, and could therefore reproduce any
behaviour by the parties. It follows that the effects iden-
tified will not be sufficient in themselves to create or
strengthen a dominant position.

Possible snowball effects

(91)

Finally, it should also be noted that the risks related to a
launch failure are relatively higher for the smaller satel-
lite operators, which usually only have one or two satel-
lites and might therefore risk bankruptcy in the event of

(95)

Third parties have indicated that even a small number of
launches won or lost could cause dramatic changes to
their market positions, because of the importance of
fixed costs in the launch service business and of the
current excess capacity in that sector. In particular, these
third parties argued that they already operated close to

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their break-even capacity, so that even a few losses could
make them unprofitable. In that context, and taking into
account the absence of any expected significant growth
of the market in terms of volumes, those third parties
argued that the possibility that the proposed transaction
could deprive them of several contracts would consider-
ably weaken their competitive position and increase
their costs. By contrast, the same effect would strengthen
Boeing's position and consequently lead to the creation
of a dominant position for Boeing on the market for
launch services.

launch business.

launches account for a substantial proportion of Lock-
heed Martin and Boeing's
In that
context, and insofar as the launch service industry is
usually considered as a critical sector to the governments
concerned, which substantially contribute to the devel-
opment of
it seems highly likely that,
should Lockheed Martin or Arianespace become less
competitive,
the governments concerned would take
steps to restore those companies' competitiveness.

launchers (1),

(96)

for

In short, the argument of those third parties is that the
loss of even a limited number of launches would be
sufficient
to spur a snowball effect with devastating
consequences for their cost structure (and, conversely,
hugely beneficial consequences
that of Boeing),
thereby undermining their competitive position, and
enhancing Boeing's, to such an extent as to create a
dominant position.
third
In support of
parties insisted on the relative importance of the amorti-
sation of
fixed costs (as high as USD 30 million
compared to an average price launch of around USD
100 million, according to certain third parties), and on
the limited number of satellite launches taking place
each year.

this theory,

(100) Fourthly,

it is highly questionable whether the launch
service sector would be monopolised in the way
described by third parties, even HSC were to behave in
the manner described in paragraph 82. Given that the
price difference between a winning bid and a losing bid
is much lower than the amortisation of fixed costs, it
appears that, if a launch vehicle supplier were to become
less cost-competitive, it would try to cut prices in order
to salvage volume and recoup at least a part of its fixed
costs rather than accept losing a contract and incur a
higher loss. The most likely outcome would therefore be
greater price competition rather than market monopoli-
sation. In view of the governments' commitment in their
respective space industry (the share of government
funding for the development of new launchers is only
one sign of
this would not eliminate Boeing's
immediate rivals as effective competitors, and would
consequently not create a dominant position for Boeing.

this),

(97) However, this theory appears to be based on a number
of questionable assumptions. First of all, it appears that
competition in the launch service sector is not primarily
based on price, but, rather, on reliability. Prices for
launch services may already differ significantly from one
launch service operator to another. In that context, a
limited increase in costs would not seem to have the
devastating consequences put forward by third parties.

(101)

In the light of the foregoing, it appears that the notified
operation will not create or strengthen a dominant posi-
tion on the markets for launch services as a result of
which effective
significantly
impeded in the EEA or any substantial part of that area.

competition would be

(98)

(99)

Secondly, the possibility for a snowball effect as identi-
fied by third parties crucially depends on the cost struc-
those third party launch service operators
ture of
remaining at its current position. However,
it appears
that competitors (essentially ILS and Arianespace) have
engaged in cost reduction programmes, leading either to
a reduction of capacity or an increase of
launcher
competitiveness.

Thirdly, the identified effects are limited to the commer-
cial sales of the undertakings concerned by the proposed
transaction. However, commercial
launches do not
represent all of the launches, so that a loss of competi-
tiveness on the commercial market could be more than
offset by new contracts on the government side. This is
particularly true in the United States, where government

(102) The Commission notes that, on 31 July 2000,

the
parties offered certain commitments ensuring (a) that
any non-public information relative to launchers (or
satellites) which HSC launchers
(or Boeing or Sea
Launch) could receive will not be provided or disclosed
to Boeing or Sea Launch (or HSC); (b) that HSC will
make information relating to its satellites available to
other launch service operators at the same time as it
makes such information available to Boeing or Sea
Launch; (c) that HSC will cooperate with launch service
operators other than Boeing or Sea Launch for the inte-
gration of
its satellites with launch vehicles, without
discriminating in favour of Boeing or Sea Launch; and
(d) that there will be no ‘preferred supplier’ relationship
between the merged entity and Hughes.

(1) For instance, Ariane launchers are usually developed in the context
of ESA programmes, and the development of each of the Delta IV
and Atlas V launchers appears to have been substantially funded by
through its Evolved Expendable
the United States Government
Launch Vehicle programme.

L 63/66

EN

Official Journal of the European Union

28.2.2004

V. CONCLUSION

(103)

In the light of the foregoing, the proposed operation
does not create or strengthen a dominant position as a
result of which effective competition would be signifi-
cantly impeded within the common market or in a
substantial part of it. The operation is therefore to be
declared compatible with the common market pursuant
to Article 8(2) of the Merger Regulation and with the
functioning of the EEA Agreement,

HAS ADOPTED THIS DECISION:

Article 1

The notified operation whereby the Boeing Company acquires
control of the satellite prime contracting and equipment busi-
ness of Hughes Electronics Corporation (consisting of all
outstanding shares of Hughes Space and Communications
Company (HSC), all outstanding shares of Spectrolab Inc., the
assets of Hughes Electron Dynamics (HED), and the minority
stakes held by Hughes in ICO Global Communications (Hold-

ings) Ltd and in Thuraya Satellite Telecommunications Private
Joint Stock Co.)
is hereby declared compatible with the
common market and the functioning of the EEA Agreement.

Article 2

This Decision is addressed to:

The Boeing Company
7755 East Marginal Way South
Seattle, WE 98108
USA

For the attention of Mr Theodore J Collins
Senior Vice-President, Law and Contracts

Done at Brussels, 29 September 2000.

For the Commission

Mario MONTI

Member of the Commission